THQ Denied Approval of Bankruptcy Sale Process and Loan

THQ Inc. (THQIQ), maker of the “Saints Row”
and “Company of Heroes” video-game franchises, failed to
obtain approval of a loan to help fund operations and lost its
bid for a quick bankruptcy sale.

U.S. Bankruptcy Judge Mary F. Walrath at a hearing
yesterday in Wilmington, Delaware, sided with creditors that
said the proposed sale process didn’t give potential buyers
enough time. Walrath found the video-game maker’s efforts to
market the company for sale before bankruptcy weren’t sufficient
for her to allow the aggressive sale process.

“I have problems concluding that the pre-petition sale
process was fulsome,” Walrath told lawyers at the hearing,
noting THQ “did not even put out to the public that it was for
sale” until potential buyers signed non-disclosure agreements.

About 10 potential buyers contacted THQ after finding out
about the sale from its bankruptcy filing, evidence the
marketing “isn’t an adequate substitute for a sales process in
bankruptcy,” she said.

THQ, which sought bankruptcy protection Dec. 19 with an
agreement to sell virtually all its assets to Clearlake Capital
Group LP in a deal valued at about $60 million, was seeking
approval to hold a Jan. 9 auction, according to court documents.
The company, based in Agoura Hills, California, wanted potential
buyers to submit bids by Jan. 8, followed by a Jan. 10 hearing
to approve the sale. Creditors want the sale process extended by
about three weeks.

‘Mortal Kombat’

Warner Bros. Entertainment Inc., which bought “Mortal
Kombat”‘-maker Midway Games Inc. out of bankruptcy in July
2009, would be interested in evaluating THQ’s assets if the sale
process is extended, Howard J. Weg, a lawyer representing the
company, said at yesterday’s hearing.

Creditors also want bidders to be able to make offers for
specific game titles, saying it may produce more value than only
selling the company as a whole. “The individual titles may have
substantial value” and a requirement to buy the whole company
“may depress bids,” Walrath said.

The video-game maker was also seeking approval of a
$37.5 million bankruptcy loan at yesterday’s hearing. The loan
would need to be paid off by Jan. 15, which the company said
supported its quick sale process because it would run out of
money and would have no way to pay off the loan without the
sale.

THQ exceeded its original cash flow projections for the
first couple of weeks in bankruptcy, giving it more time until
it runs out of funds, lawyers said at yesterday’s hearing.

‘Need to Talk’

“I am not convinced that we are under the gun to have a
sale process by the 15th,” Walrath told lawyers. The judge
scheduled a hearing for Jan. 7, telling lawyers, “in the
meantime I think the parties need to talk.”

Jeffrey C. Krause, a THQ attorney, said after the hearing
that Walrath wants the lawyers to negotiate over the weekend and
the company will have to consult with Clearlake, which is
providing part of the bankruptcy loan, to determine how they
will proceed.

THQ listed assets of $204.8 million and debt of $248.1
million in Chapter 11 documents filed Dec. 19. The company said
it was forced to seek court protection after sustaining losses
for the past five fiscal years.

Recent losses were tied to its “uDraw” peripheral device
for the Nintendo Wii, Sony PlayStation 3 and Microsoft Xbox 360
gaming consoles, which let users produce drawings on their
television screens. While the uDraw had early success on the
Wii, the PlayStation and Xbox versions “fell far short of
expectations,” according to court papers.

“Saints Row,” with more than 11 million units shipped
globally, is THQ’s most-successful franchise, according to a May
press release. THQ also published the “Darksiders” and “Red
Faction” franchises, according to its website.

The video-game maker said it required more time for some
titles and had to delay the March introductions of “South Park:
The Stick of Truth,” based on the popular adult cartoon show
from Matt Stone and Trey Parker; “Company of Heroes 2” and
“Metro: Last Light.”